Parcel TMS Platforms Provide Guardrails Against Retail Margin Erosion

Inability to accurately determine shipping costs during order creation and order allocation   eats away at retail margins.  Next generation parcel TMS platforms safeguard margins by applying optimized routing, rating, and ranking rules to diversified carrier services from order creation to fulfillment.  

With the rise of eCommerce, retailers have raced to adopt omni-channel fulfillment strategies to stay competitive, particularly against marketplace giants like Amazon, who have moved inventory closer to consumers for faster and lower cost delivery. But uncontrolled final mile costs continue to climb at rates far outpacing inflation, putting the squeeze on B2C retailers' already tight margins. 

To stay ahead, companies need to rethink traditional parcel management practices, move beyond simple label printing and embrace cost controls to accurately determine costs upstream from shipping.  In this article, we will examine the cost control challenges shippers face and explore how end-to-end parcel TMS platforms like Sendflex help companies protect their margins.

Parcel Shipping Dynamics in 2024

The financial landscape for B2C retailers is becoming increasingly challenging as parcel shipping costs skyrocket. In 2024, major carriers UPS and FedEx announced general rate increases (GRIs) of 5.9%, significantly outpacing the U.S. inflation rate of 2.9%. However, a deeper analysis by Reveel found that most shippers will experience actual rate increases that exceed GRIs, closer to 8% in many cases, and easily into the double digits for retailers that ship oversized packages or products that require special handling.

For further context, the projected ground parcel rate for this year at least 28.9% above the January 2018 baseline. This spike is particularly concerning as it occurs in a market where carrier capacity is abundant. Instead of following the normal laws of supply and demand, major parcel carriers have continued to raise prices.

Unexpected Fees Are Making it Harder to Predict Shipping Costs

Beyond standard rate increases, businesses are struggling to absorb or even predict the proliferation of surcharges and special service fees.  The gap between expected shipping costs and actual carrier invoice amounts is widening, leading to unexpected financial burdens.  Floating tiered carrier incentives is one culprit.  But understanding the myriad of parcel surcharges and fees is crucial for accurately calculating shipping costs and making smart decisions to protect margins. 

Here are some of the fees responsible for widening expected vs. actual shipping cost gap:

• Dimensional Weight Adjustments:  Every consumer has received packages with small items packed in large cartons.  Shippers are made to pay the price for wasting carrier vehicle cube.  Carrier’s adjust rating factoring in a container’s size (dimensional weight) rather than just the actual weight. This can significantly drive costs up higher, particularly as higher weight breaks face some of the steepest increases.  
• Residential and Extended Area Surcharges: Deliveries to residential and remote areas incur additional surcharges due to the increased effort and mileage required. These charges can add up quickly, making it essential for retail shippers to anticipate and account for these costs by utilizing available tools that can accurately identify residential and remote delivery areas.
• Address Correction Fees:  Shippers using incorrect or incomplete addresses get hit with address correction surcharges, which are commonly overlooked but can accumulate very quickly.  The average correction costs over $10 per package. Using address validation tools flags or fixes incorrect addresses prior to shipping, reducing the risk of these unexpected fees.
• Oversize Packages or Special Handling Requirements: Shipments that require special handling or involve packages over 50 pounds are particularly vulnerable to additional fees, which can be 16% to 20% higher than GRIs. Major carriers have been aggressively raising handling surcharges for items that can’t be processed through their standard systems.
• Demand Surcharges: During peak periods and holidays, carriers implement demand surcharges to cover increased operational costs and manage high shipping volumes. These fees are usually higher for large packages or those requiring special handling, further straining shipping budgets during busy seasons.

In addition to unexpected surcharges and fees, primary carrier contracts incorporate complex incentive discount tiers that are difficult to monitor and control.  Fear of losing discounts is a reason many shippers avoid parcel carrier diversification.  Without careful planning, loss of primary carrier discounts and unexpected surcharges can quickly erode margins and threaten profitability.

The Growing Gap Between Estimated and Actual Shipping Costs

In today’s eCommerce environment, consumer expectations for free shipping are at an all-time high. With 50.6% of online shoppers ranking free delivery as their top purchase driver, offering this perk is a significant advantage.  Surveys show that 48% of U.S. consumers cite extra costs—like shipping, taxes, and fees—as the primary reason for abandoning their shopping carts.

So long as free shipping remains an eCommerce standard, merchants must find ways to accurately estimate and factor shipping costs into their product margins.  But the gap between what shippers expect to pay and what they incur is growing wider. In addition to unexpected surcharges and fluctuating carrier discount tiers, uncertainties related to inventory location, SKU attributes, and unknown carton sizes make it difficult to predict final shipping costs.

Shippers can’t expect legacy shipping systems to address the margin issue. These systems focus primarily on printing labels for multiple carriers at the end of a conveyor rather than shipping cost containment and forecasting. Shipping cost optimization needs to occur further upstream from shipping execution during order creation and allocation.  

Traditional WMS and OMS systems don’t address the transportation cost-effective factors that can erode margin.  These systems focus on fulfillment efficiency.  For example, while WMS and OMS platforms do some level of “cubing”, they don’t take dimensional weight costing factors into account. If they did, customers wouldn’t have to haul away so much excess corrugate and packing material to landfills.  Shippers would not be as surprised to find dimensional weight adjustments on their carrier invoices.

To close expected vs. actual shipping cost gap, retailers need more sophisticated tools that can accurately estimate and manage shipping costs at every stage of the fulfillment process. Without this, the promise of free shipping could quickly turn from a competitive edge into an unpredictable financial burden.

How Sendflex Closes the Gap

To address the widening shipping expense gap, Sendflex’s Parcel TMS platform goes beyond shipping automation and label printing, automating shipping cost calculations and optimization decision-making processes further upstream, effectively reducing margin erosion at every stage of the order-to-delivery process and beyond.

• Order Creation: Sendflex uses SKU data to accurately determine carton size and weight in digital storefronts and ERP systems. Its high-speed in-platform optimization engine calculates routes, rates, and transit times for a range of delivery options without relying on slow carrier APIs, ensuring precise cost estimations from the start.
• Order Allocation: Once an order is created, Sendflex helps Order Management Systems (OMS)  determine the best fulfillment origin, considering factors like consolidation, inventory availability,  drop shipping, and carrier diversification. No-code business rules allow shippers to avoid or at least anticipate surcharges and dimensional weights while also ensuring that carrier tier incentives are monitored and maintained.  SKU-based rules automate shipping charge adjustments to maintain margin.
• Order Fulfillment: Sendflex reinforces shipping cost-effective cartonization and carrier service selection during the pick, pack, and shipping processes by applying optimization instructions, further enhancing cost accuracy and efficiency.
• Shipping Automation:  Reinforce optimization instructions at the point of shipping.  Monitor carrier pickup windows and cutoffs to ensure delivery promises can be met.  Use instructions to generate custom labels and documents.
• Returns Dispositioning: Recognizing that returns represent a significant cost for retailers, Sendflex provides intelligent returns dispositioning instructions based on SKU attributes, customer preference, consolidation opportunities, and other factors, helping to manage reverse logistics costs more effectively.

Sendflex also offers powerful simulation capabilities that allow retailers to forecast and refine their shipping strategies before execution. These tools enable users to model different scenarios and test various shipping routes, carriers, and service levels to identify the most cost-effective options. By simulating potential outcomes, retailers can gain a deeper understanding of their shipping expenses and make data-driven decisions that prevent unexpected cost overruns. This approach helps to close the gap between estimated and actual costs and empowers retailers to safeguard their margins in an ever-changing market.

Protect Your Margins with Sendflex

Controlling parcel shipping costs is crucial for maintaining profitability. With Sendflex, retailers have the tools they need to manage these costs effectively and protect their margins. Contact the experts at Sendflex for a consultation and demo to see how their Parcel TMS can transform your shipping operations.

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